NOTES ON TAXATION

TO READ: “Their Fair Share: Taxing the Rich in the Age of FDR” by Joseph Thorndike

Broad question: Is it true that increasing – or maybe just not cutting – taxes on “businesses” and/or “thewealthy” (wait, are those two the same thing?) will ultimately hurt ordinary people via increasingbusiness costs, leading to firing/laying off of workers, reduced demand, etc?

From Ha-Joon Chang, 23 Things:

“When the dreaded over-taxation of the rich started in earnest, it did not destroy capitalism. In fact, itmade it even stronger. Following WWII, there was rapid growth in progressive taxation and socialwelfare spending in most of the rich capitalist countries. Despite this (or rather partly because of this),the period between 1950 and 1973 saw the highest ever growth rates in these countries – known as theGolden Age of Capitalism. Before the Golden Age, per capita income in the rich capitalist economiesused to grow at 1-1.5 percent per year. During the Golden Age, it grew at 2-3 percent in the US and inBritain, 4-5 percent in W Europe, and 8 percent in Japan. Since then, these countries have nevermanaged to grow faster than that.

When growth slowed down in the rich capitalist economies from the mid-70s, however, the free-marketeers dusted off their 19th century rhetoric and managed to convince others that the reduction inthe share of the income going to the investing class was the reason for the slowdown.

Since the 80s, in many (although not all) of these countries, govts that espouse upward incomeredistribution have ruled most of the time. Even some so-called left wing parties, such as Britain's NewLabour under Tony Blair and the American Democratic Party under Bill Clinton, openly advocatedsuch a strategy – the high point being Bill Clinton introducing his welfare reform in 1996, declaringthat he wanted to 'end welfare as we know it'.

In the event, trimming the welfare state down proved more difficult than initially thought. However, itsgrowth has been moderated, despite the structural pressure for greater welfare spending due to theaging of the population, which increases the need for pensions, disability allowances, healthcare, andother spending directed to the elderly.

More importantly, in most countries there were also many policies that ended up redistributing incomefrom poor to rich. There have been tax cuts for the rich – top income-tax rates were brought down.Financial deregulation has created huge opportunities for speculative gains as well as astronomicalpaychecks for top managers and financiers. Deregulation in other areas has also allowed companies tomake bigger profits, not least because they were more able to exploit monopoly powers, more freelypollute the environment, and more readily fire workers. Increased trade liberalization and increasedforeign investment – or at least the threat of them – have also put downward pressure on wages.

As a result, income inequality has increased in most rich countries. E.g. according to InternationalLabour Organization (ILO), of the 20 advanced economies for which data was available …. data onincreased inequality.

WATER THAT DOES NOT TRICKLE DOWN

All this upward redistribution of income might have been justified, had it led to accelerated growth. Butthe fact is that economic growth has actually slowed down since the start of the neo-liberal pro-richreform in the 1980s. According to World Bank data, the world economy used to grow in per capitaterms at over 3 percent during the 60s and 70s, while since the 80s, it has been growing at the rate of1.4 percent per year.

In short, since the 1980s, we have given the rich a bigger slice of our pie in the belief that they wouldcreate more wealth, making the pie bigger than otherwise possible in the long run. The rich got thebigger slice of the pie all right, but they have actually reduced the pace at which the pie is growing. (Isthis fair? I don't think so.)

The problem is that concentrating income in the hands of the supposed investor, be it the capitalist classor Stalin's central planning authority, does not lead to higher growth if the investor fails to invest more.When Stalin concentrated income in Gosplan, the planning authority, there was at least a guarantee thatthe concentrated income would be turned into investment. Capitalist economies do not have such amechanism. Indeed, despite rising inequality since the 1980s, investment as a ratio of national outputhas fallen in all G7 economies and in most developing countries.

Even when upward income redistribution creates more wealth than otherwise possible, there is noguarantee that the poor will benefit from those extra incomes. Increasing prosperity at the top mighteventually trickle down and benefit the poor, but this is not a foregone conclusion.

Trickle down usually does not happen very much if left to the market. E.g. according to the EPI, the top10 percent of the US population appropriated 91 percent of income growth between 1989 and 2006,while the top 1 percent took 59 percent. In contrast, in countries with a strong welfare state it is a loteasier to spread the benefits of extra growth that follows upward income redistribution (IF it happens)through taxes and transfers.

Last but not least, there is reason to believe that downward income redistribution can help growth, ifdone in the right way at the right time. E.g. in an economic downturn like today's, the best way to boostthe economy is to redistribute wealth downward, as poorer people tend to spend a higher proportion oftheir incomes. The economy-boosting effect of the extra billion dollars given to the lower-incomehouseholds through increased welfare spending will be bigger than the same amount given to the richthrough tax cuts. Moreover, if wages are not stuck at or below subsistence levels, additional incomemay encourage workers' investment in education and health, which may raise their productivity andthus economic growth. In addition, greater income equality may promote social peace by reducingindustrial strikes and crime, which may in turn encourage investment, as it reduces the danger ofdisruption to the production process and thus to the process of generating wealth. Many scholarsbelieve that such a mechanism was at work during the Golden Age of Capitalism, when low incomeinequality coexisted with rapid growth.

CUTTING STATE CORPORATE INCOME TAXES IS UNLIKELY TO CREATE MANY JOBS:

Best Argument for Taxing the Rich: Our richest citizens have benefited most from the policies that rightwing extremists have been implementing for the past 25 years. The wealthy caused these policies andthey benefit the most from them.Sure, Republicans work hard – at getting right wing politicians elected. And they're successful, becausethose politicians bias our economy to greatly favor them.Especially since the 80s began, conservative politicians have made corporations more profitable,they've increased the wealth of the already wealthy, and they've forced huge sacrifices on middle andlow income Americans. They accomplished this by:

– forcing workers to compete with the most brutalized workers in the world – loading the courts with Republican judges – manipulating the prime rate – passing all kinds of anti-worker legislation

It's only fair that those who caused these conditions (by getting America's right wing extremistselected), and benefited from them, pay their fair share of the costs they generated.

A SECOND ARGUMENT FOR THE PROGRESSIVE TAX

Between 1942 and 1962, the tax rate for our richest Americans was at least 88 percent and as high as 91percent. In those days, when CEOs considered firing thousands of workers for a million dollar bonus,the moral condemnation didn't seem to be worth it. After taxes, it only amounted to, say, 120k dollars.Today, when a CEO fires thousands of workers, he gets a two million dollar bonus and he gets to keepa million of it. And when he retires he can move to one of our country's many guarded communitieswith his millionaire cronies, and he gets virtually no moral condemnation from his golfing buddies.

So let's go back to the tax rates we had for our richest citizens between 1942 and 1962. Or at least wecould go to the rates we had from 1962 to 1982, when it was at least 70 percent.

Over that period of 40 years between 42 and 82, NONE of the bad things that conservatives warn abouthappened. We DIDN'T have massive unemployment, we DIDN'T stifle innovation, and above all, weDIDN'T become communists.

WHY CAPITAL GAINS TAX CUTS ARE BAD FOR WORKERS

Conservatives argue that we should give rich people capital gains tax breaks for “investing in jobs” andto stimulate the economy. It's a phony argument. In most cases, it's simply another scheme to continuethe transfer of wealth from middle and low income workers to the wealthy.

You stimulate the economy and create jobs by getting money into the hands of consumers, not byhelping the wealthy buy mansions in Paris or invest in Chinese, Indian, Mexican, etc. businesses.

The biggest cause of the Depression of the 30s: the wealthy had plenty of money, but the averageperson didn't have enough even to buy the products they needed that were in the stores. It's a painfullysimple fact: when consumers have money to buy, someone will invest money to get it. Whenconsumers DON'T have money to buy, NO ONE will risk their money to invest.

Republicans consistently ignore the historical fact that, after Clinton got his Deficit Reduction Actpassed, in which taxes were increased for the top 1.2 percent of Americans, we had a decade ofeconomic growth so strong that conservative economists were calling for the Fed to slow down theeconomy.Of course, much of the capital gains taxes that conservatives fight for are for passive investments thatadd nothing to the economy. E.g. suppose a person buys up ten rental houses, raises the rent, and thensells those homes at a huge profit. Conservatives say that he shouldn't have to pay as much tax on hisprofit as a construction worker pays on his fixed salary. Or a secretary or a truck driver, etc. Not onlydoes the investor make huge untaxed profits, he took several homes off the market and increased theprice of homes for workers who may later want to buy one of them.

WHY RAISING TAXES ON THE RICH IS GOOD ECONOMICS

http://www.cbsnews.com/news/why-raising-taxes-on-the-rich-is-good-economics/ (Based on analysisfrom the Economic Policy Institute and The Century Foundation)

10 reasons to raise tax revenue from the highest-earning households:

1) Meager revenues and Bush-era tax cuts contribute greatly to the deficit 2) Even if taxes on those with the highest incomes are substantially increased, income gains at the top over time would still dramatically outpace gains among the rest of the population 3) The top one percent of households benefited disproportionately from the Bush-era tax cuts 4) Recent income gains for the highest-income one percent have far exceeded gains for everyone else, leading to dramatic income concentration at the top of the scale. Now, more than ever, the highest-income households are in a better position to pay taxes. 5) Wealth is even more concentrated at the top than income, and the main wealth tax – the estate tax - has been sharply reduced in recent years. 6) Reasonable proposals for taxing the highest-income households can raise significant amounts of revenue. 7) By not taxing the highest-income households, deficit reduction relies too heavily on spending cuts that harm low- and middle-income Americans. 8) Raising taxes on the highest-income households reduces the deficit without having much impact on the economic recovery or job growth. 9) Few small business owners have exceptionally high incomes, and thus few would be affected by these tax increases on the highest-income households. 10) The progressivity of the federal income-tax system offsets the regressive nature of federal payroll taxes and state and local tax systems.

GOOD RESOURCE: TAX POLICY CENTER

WHY TAX HIKES WOULDN'T HURT SMALL BUSINESS – Key question: Of the millions ofindividuals who report business income in the US, what percentage fall in the top income brackets? Avery small percentage. The taxes we're proposing DON'T target small businesses. And small businessesare the primary creators of new jobs.

ECONOMISTS SAY WE SHOULD TAX THE RICH AT 90 PERCENT

All Americans, including the rich, would be better off if top tax rates went back to Eisenhower-eralevels when the top federal income tax rate was 91 percent, says this paper http://www.google.com/url?q=http%3A%2F%2Fpapers.nber.org%2Ftmp%2F99111-w20601.pdf&sa=D&sntz=1&usg=AFQjCNH02vDYlaRVv9IcHdFRkwIRRhEcPgThe top tax rate that makes all citizens, including the highest 1 percent of earners, the best off is“somewhere between 85 and 90 percent” according to Krueger. Currently, the top rate of 39.6 percentis paid on income above 406750 dollars for individuals and 457600 for couples.

Fewer than 1 percent of Americans, or about 1.3 million people, reach that top bracket.

We've had decades of more or less strict adherence to the gospel that tax cuts for the highest incomeearners are good. The trend began with President Kennedy, though his cuts were hardly radical. Helowered rates when the American economy was humming along, no longer paying for WWII and,relative to today, an egalitarian dreamland. To put things in perspective, Kennedy cut rates to around 70percent, a level we can hardly imagine raising them to today. The huge drops – from 70 percent to lessthan 30 percent – came with the Reagan presidency.

In comparison to decades of cuts, Presidents Bush I, Clinton, and Obama each raised taxes at the top bya historically insignificant amount. Obama also proposed modest tax increases, raising taxes onfamilies making more than 250k from 33 to 36 percent, and on individuals making more than 200kfrom 36 to 39.6 percent. These increases failed in the House.

A 90 percent top marginal tax rate doesn't mean that if you make 450k, you are going to pay 405k infederal income taxes. Americans have a well-documented trouble understanding the notion of marginaltax rates. The marginal tax rate is the amount you pay on your income above a certain amount. Rightnow, you pay the top marginal tax rate on every dollar you earn over 406750. So if you make 450k, youonly pay the top rate on your final 43250.

A very high marginal tax rate isn't effective if it's riddled with loopholes. The paper linked above is alsofocused solely on income, not wealth, and returns on wealth are how the truly superrich make a living.

The authors say that a top marginal tax rate in the range of 90 percent would decrease both income andwealth inequality, bring in more money for the govt and increase everyone's well-being – even thosesubject to the new, much higher income-tax rate.

Krueger: “High marginal tax rates provide social insurance against not making it into the 1 percent.”Here's what he means: There's a small chance of moving up to the top rung of the income ladder. Ifrates are high for the top earners and low for everyone else, there's a big chance you will pay a low rateand a small chance you will pay a high rate. Given these odds, it's rational to accept high income taxrates on top earners and low rates for the rest as a form of insurance. This insurance takes the form oflow-income people paying dramatically less in taxes.

The paper assumes that tax rates won't stop a future Bill Gates from wanting to start Microsoft. Instead,what it finds is that labor supply among the 1 percent would decline – they would work a little less –but “it does not collapse.” That's because of who the authors assume makes up the top income bracket:celebrities, sports stars, and entrepreneurs – people with innate talents that are hugely rewarding, butonly for a short period of time. They only have a few years to use their skills to make most of themoney they will ever make. High tax rates don't lessen their degree of desire to be productive, theauthors said.

HMM, SEEMS SKETCHY

A good part of the money the rich save from taxes is lent by them to the government (in the form ofbuying US Treasury securities for their personal investment portfolios). It would obviously be better forthe government to tax the rich to maintain its expenditures, and thereby avoid deficits and debts. Then,the govt would not need to tax the rest of us to pay interest on those debts to the rich.

Second, the richest Americans take the money they save from taxes and invest big parts of it in China,India, and elsewhere. That often produces more jobs over there, fewer jobs here, and more imports ofgoods produced abroad. US dollars flow out to pay for those imports and so accumulate in the hands offoreign banks and foreign govts. They, in turn, lend from that wealth to the US govt because it does nottax our rich, and so we get taxed to pay for the interest Washington has to pay out to those foreignbanks and governments. The largest single recipient of such interest payments today is the People'sRepublic of China.

Third, the richest Americans take the money they don't pay in taxes and invest it in hedge funds andwith stockbrokers to make profitable investments. These days, that often means speculating in oil andfood which drives up their prices, undermines economic recovery for the mass of Americans andproduces acute suffering around the globe. Those hedge funds and brokers likewise use part of themoney rich people save from taxes to speculate in US stock markets. That has recently driven stockprices higher; hence the stock market recovery. And that mostly helps – you guessed it – the richestAmericans who own most of the stocks.

TAXING THE WEALTHY PROMOTES ECONOMIC GROWTH:

Economist's View: DOES TAXING THE WEALTHY HURT GROWTH?

http://economistsview.typepad.com/economistsview/2012/10/does-taxing-the-wealthy-hurt-growth.html From Ethan Kaplan: What is the impact of taxation on growth? In theory, a countrywithout taxation will have difficulty providing basic public goods such as roads and research that arefundamental for economic growth. However, many politicians and some economists argue that oncebasic public goods are provided for, increases in taxation have a negative impact on growth. Accordingto this argument, this is especially true for taxes on the very wealthy, who are likely to save theirincome and channel that savings into entrepreneurship or other investment. Much of the argument overtax policy in the US is focused on whether the rich should be taxed at a higher or lower rate than theyare today. The argument in favor of higher rates is that income inequality is at extremely high levelsand the govt should focus more on redistribution and also that the rising national debt is also potentiallyharmful to growth. The argument against higher rates is that raising taxes on the wealthy woulddisincentivize the people most likely to create economic growth and thus jobs. In a climate where jobsare scarce, the argument goes, this is a particularly bad economic idea.

This debate, however, is largely based on ideology rather than evidence. Unfortunately, it is quitedifficult to figure out the impact of taxation on growth. Changes to the tax codes usually pass Congresswhen other things are happening to the economy. E.g., the 1982 tax cuts, which dropped the topmarginal tax rate from 69 percent to 50 percent, were passed towards the end of a large recession.Moreover, the impact of taxes on growth can change over time as the economy changes.Nevertheless, looking at the raw correlation between top marginal tax rates and growth can be helpfulfor getting a rough sense of the likely impacts of higher taxation on growth. One recent paper byPiketty, Saez, and Stantcheva looks at the correlation between top marginal tax rates and growth andfinds the growth is higher when top marginal tax rates are higher. I restrict myself to the historicalexperience of the US and go back to 1930. In particular, I took real chained per capita GDP growthfrom 1930 to the present from the Bureau of Economic Analysis website. The correlation over thisperiod between the top marginal tax rate and output growth is strong and positive (see chart onwebpage).

While we cannot say that there is a robust significant positive relationship between tax rates andgrowth, it is still interesting that regardless of when we start the sample, higher top marginal tax ratesare associated with higher, not lower, growth. Moreover, a narrative reading of postwar US economichistory leads to the same conclusion. The period of highest growth in the US was in the post-wr erawhen top marginal tax rates were 94 percent (under Truman) and 91 percent (through 1963). As topmarginal rates dropped, so did growth. Moreover, except for 1984, a recovery year, the highest percapita growth rates since 1980 were all in the late 1990s, after the top marginal tax rate had beenincreased from 28 percent under Reagan to 31 percent under Bush I and then 39.6 percent underClinton. One possible reaction to this finding is that what matters more than the top marginal tax rateon income is the capital gains tax rate, but growth has also been higher when the capital gains tax ratehas been higher. (http://webcache.googleusercontent.com/search?q=cache:HVUKqa2ZEfgJ:www.forbes.com/sites/leonardburman/2012/03/15/capital-gains-tax-rates-and-economic-growth-or-not/+&cd=1&hl=en&ct=clnk&gl=us)

So what does this tell us? Of course, it would be silly to make the argument that increasing topmarginal rates from 0 to 100 percent increased per capita growth by almost 6 percentage pts per year.No doubt there are other factors that could confound the relationship between tax rates and growth.However, the changes in top marginal tax rates over the period are quite large, so it seems likely that ifraising top marginal rates did have a large negative impact on growth, we should be able to see it in thecorrelations. Thus, it also seems silly to argue that higher taxes on the rich have a large negativeimpact on growth, given that historically growth is, if anything, positively correlated with the topmarginal rate.

What does this mean for public policy? Given the large rise in inequality in the US over the past 40 yrs,if the historical evidence tells us that it is unlikely that taxing the wealthy has a large negative impacton growth (and it might even have a positive impact), shouldn't we increase rates on the wealthy fromtheir current top rates of 35 percent?

ROBERT REICH ON WHY WE MUST TAX THE RICH: http://robertreich.org/post/4344201496

The only way America can reduce the long-term budget deficit, maintain vital services, protect SocialSecurity and Medicare, invest more in education and infrastructure, and not raise taxes on the workingmiddle class is by raising taxes on the super rich.

Even if we got rid of corporate welfare subsidies for big oil, big agriculture, and big pharma - even ifwe cut back on our bloated defense budget – it wouldn't be nearly enough.

The vast majority of Americans can't afford to pay more. Despite an economy that's twice as large as itwas 30 yrs ago, the bottom 90 percent are still stuck in the mud. If they're employed, they're earning onavg only about 280 dollars more per year than 30 years ago, adjusted for inflation. That's less than 1percent gain over more than a third of a century. Families are doing somewhat better, but that's onlybecause so many families now rely on two incomes.

Yet even as their share of the nation's total income has withered, the tax burden on the middle hasgrown. Today's working and middle-class taxpayers are shelling out a bigger chunk of income inpayroll taxes, sales taxes, and property taxes than 30 years ago.

It's just the opposite for the super-rich.

The top 1 percent's share of national income has doubled over the past 3 decades, from 10 percent in1981 to well over 20 percent now. The richest 1/10 of 1 percent's share has tripled. And they're doingbetter than ever. According to a new analysis by WSJ, total compensation and benefits at publiclytraded Wall St banks and securities firms hit a record in 2010 - $135 billion. That's up 5.7 percent from2009.

Yet, remarkably, tax rates on the top have plummeted. From the 1940s until 1980, the top tax incomerate on the highest earners in America was at least 70 percent. In the 1950s it was 91 percent. Now it's35 percent. Even if you include deductions and credits, the rich are now paying a far lower share oftheir incomes in taxes than at any time since WWII.

The estate tax, which only hits the top 2 percent, has also been slashed. In 2000 it was 55 percent andkicked in after 1 million dollars. Today it's 35 percent and kicks in at 5 million dollars. Capital gains –comprising most of the income of the super-rich – were taxed at 35 percent in the late 80s. Now they'retaxed at 15 percent.

If the rich were taxed at the same rates they were half a century ago, they'd be paying in over 350billion more this year alone, which translates into trillions over the next decade. That's enough toaccomplish everything the nation needs while also reducing future deficits.

If we also cut what we don't need (corporate welfare and bloated defense), taxes could be reduced foreveryone earning under $80k, too. And with a single payer health-care system – Medicare for all –instead of a gaggle of for-profit providers, the nation could save billions more.

Yes, the rich will find ways to avoid paying more taxes courtesy of clever accountants and taxattorneys. But this has always been the case regardless of where the tax rate is set. That's why the govtshould aim high. (During the 50s, when the top rate was 91 percent, the rich exploited loopholes anddeductions that as a practical matter reduced the effective top rate 50 to 60 percent – still substantial bytoday's standards.)

And yes, some of the super rich will move their money to the Cayman Islands and other tax shelters.But paying taxes is a central obligation of citizenship, and those who take their money abroad in aneffort to avoid paying American taxes should lose their American citizenship.

But don't the super-rich have enough political power to kill any attempt to get them to pay their fairshare? Only if we let them. Here's the issue around which Progressives, populists on the right and left,unionized workers, and all other working people who are just plain fed up ought to be able to unite.Some data refuting trickle-down economics:http://www.faireconomy.org/trickle_down_economics_four_reasons